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New Keynesian Phillips Curve with time-varying parameters

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  • Kuo-Hsuan Chin

    (Feng Chia University)

Abstract

I generalize the New Keynesian Phillips Curve model of Galí and Gertler (J Monet Econ 44:195–222, 1999) to allow for time-varying parameters. The parameter of interest measures the trade-off between inflation and real economic activity, and it is particularly a nonlinear function of three underlying structural parameters: the discount factor, the degree of price rigidity and the strength of backward-looking behavior or information diffusion. The empirical results show that the estimated parameter of output-inflation trade-off is time varying and is larger in high inflation periods. Specifically, the time-variation of the trade-off between inflation and economic activity stems from the degree of price rigidity, which is negatively correlated with inflation. Moreover, the forward-looking price-setting behavior plays a dominant role in explaining inflation dynamics for most part of the sample period.

Suggested Citation

  • Kuo-Hsuan Chin, 2019. "New Keynesian Phillips Curve with time-varying parameters," Empirical Economics, Springer, vol. 57(6), pages 1869-1889, December.
    • Handle: RePEc:spr:empeco:v:57:y:2019:i:6:d:10.1007_s00181-018-1536-2
    DOI: 10.1007/s00181-018-1536-2
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    More about this item

    Keywords

    Stability; Time-varying parameter; Generalized method of moments; New Keynesian Phillips Curve;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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